A vast majority of Indian middle class has some or other ULIP/Endowment life insurance policy. Why is that so?
When a layman goes to the insurance company/agent to buy a term insurance policy. The insurance agent speaks 2 simple sentences-
“If you buy term insurance, you will need to die to get money”
“Paisa waste ho jaayega if you buy term insurance”- your money will get wasted if you don’t die. So, sir, please buy endowment/ULIP- where you will get your money back after 5/10/15 years. Return of premium + bonus, guaranteed by the xxx of India!
This weekend, medical insurance was a hot topic on a 100+ doctors group discussion. This article is a summary of that discussion. Some of the doctors were advisors to the insurance companies.
Health insurance is of 3 types-
CGHS, ECHS etc- where life long OPD+IPD cover is provided by the employer.
Health insurance coverage as part of corporate job- covered by pvt medical insurance companies. Valid as long as one is in the job.
Health insurance bought by individuals directly from the private medical insurance companies.
The first kind (CGHS, ECHS) is one of the best medical cover one can have. It covers both OPD and IPD expenses and there is no out of pocket expenditure.
The second type is also decent, though it covers only IPD but the claims are easily paid by the insurance company as it is provided through the corporate company. However, it is valid as long as one has the job.
Since most people today work in the private sector, and the jobs are no longer the permanent type, many people have started buying the 3rd type of insurance- directly from the private medical insurance companies.
Why does one buy insurance?
To cover risk which is unforseen expenditure in the future.
Some examples of real life medical expenditure-
Chronic diseases in old age- e.g.- Diabetes + AF, or an auto-immune disease+thyroid. Annual medical bill of pharmacy, diagnostics, consultation, physiotherapy- 2 lakh as of today. Including inflation, next 10 yrs bill = 30 lakhs. This is just the OPD bill- which is not covered by medical insurance.
Cancer or chronic debilitating diseases starting with an acute onset eg. stroke followed by paralysis, or an organ failure followed by organ transplant and chronic care etc- immediate IPD bill of 50 lakhs followed by annual bill of 3-4 lakhs in OPD expenses. Next 10 years medical bill would be 1 crore including the acute IPD tratment.
Organ failure due to a pre-existing disease that you did not know existed earlier- for example a congenital kidney abnormality or a polycystic kidney (which you may be having without your knowledge) can lead to kidney failure in old age. However, this will not be covered by insurance.
The Indian medical insurance fails to provide risk cover in all 3 instances-
Chronic diseases– As people are ageing and newer and expensive treatments are coming up, the biggest expenses in healthcare in coming decades will be OPD (pharmacy, diagnostics, consultation) expenses and not IPD expenses. This will be true for majority of the population.
Sudden very big IPD expenses– cancer, organ transplant, prolonged ICU- where bill is 30-50 Lakhs+. Since, most people buy insurance for 3-10 lakhs, here again it is pretty much useless.
Pre-existing conditions- Many people have pre-existing condition but they themselves don’t know it. You can have a cyst in the brain or polycystic kidney and many other conditions without any symptom. It may manifest 10 years later.
In the west, either the health coverage is provided by the govt or the health insurance cover OPD expenses and all big expenses including organ transplants and cancer.
However, in India, the healthcare insurance companies are not covering OPD expenses. As mentioned in the first example above, the OPD expenses for chronic diseases over 10 years would be 20-30 Lakhs compared to 5-7 lakhs of likely IPD expenses.
Even for IPD, the insurance companies have a long list of exclusion, pre-existing clauses where they would not pay. They will do their best to deny the claim unless you are working in a corporate job. (wherein they pay easily as it is a large group policy).
Also, if you start claiming your healthcare insurance or you get a chronic diseases, they will raise their annual premium substantially. The majority of healthcare expenditure occurs after you cross 60 years of age. Just call any insurance company and try getting an insurance for a 65 yrs old.
It is funny that only in India health insurance means only IPD coverage and not OPD, though the majority of actual healthcare expenses happen in the OPD. A patient with 3 lakh expenditure in OPD/year doesn’t deserve reimbursement from insuance company but a patient with 1 lakh IPD expenditure deserves it. What is this logic?
Well, most of usually look at the index number to look at index gains or losses. There is another metric which one can use and that is total market cap of B group stocks listed on BSE.
Here is a graph of market capitalisation of all B group stocks listed on BSE.
This is the monthly picture-
Monthly chart- Market cap of all B group shares on BSE
Here is the yearly picture-
Yearly chart- Market cap of all B group shares on BSE
Monthly data is only available from April 2013, while annual data is available from 2001.
The B group market cap reached 24.3 lakh crores in Decemeber 2017 and is now at a mere 11.1 lakh crore market cap. This is a drop of 55%. Comparatively, in 2008 the market cap dropped from 8.3 lakh crore to 3.2, 61% drop.
The drop is pretty close to 2008 in terms of mkt cap!
In Feb 2016, when Nifty touched 6800, B group market cap was at 10.2 lakh crore. Today, while Nifty is up 60% since then, the B group market cap is only 9% up at 11.1 lakh crores.
Infact the gain in market cap of B group shares since 2010 is a negative 10%.
Well, this explains the condition of the broader market much better than just the small cap index! Does it?
Cash is the raw material for NBFCs. They buy this raw material from the wholesale market, convert it into different kind of products, and then sell these products to different kind of customers.
What will happen to tyre companies if rubber prices suddenly double, or to airline stocks if the crude prices suddenly double. Also, if their raw material becomes scarce in addition to the double price. The stocks of those companies will tank because the market will assume that higher rubber prices will dent the tyre companies margin, reduce return on capital and and hence, also lower return on equity.
The same is happening in the market right now. Due to liquidity crunch, the raw material for these NBFC borrowing from the wholesale market has gone up. The higher cost of cash/raw material has affected their growth and also margins to some extent (though lending rates have also gone up).
However, the markets are pricing them as if the liquidity crunch is permanent. Crude went to 100 USD but it did not sustain there for a long period of time. Liquidity crunch has come many times in Indian markets before as well. However, it has never been for more than 12-13 months. Even 2008 crisis of epic proportions got resolved and was followed by a mega liquidity led rally.
Liquidity is known to suddenly vanish and suddenly return as well. Right now, it has completely disappeared from the Indian markets.
In addition, there are quite a bit of rumors of rise in NPAs, real estate loans becoming NPAs etc. Irrespective of liquidity crunch, companies with poor lending practices have high NPA. For example, PSU banks, ICICI, Axis vs HDFC/IndusInd etc. Liquidity crunch doesn’t make a good loan into a bad loan. Poor quality NBFC always had higher NPAs despite normal liquidity.
Similar panic played out in PSU banks in Feb 2016. SBI, the largest PSU bank went to a price level of 150 at that time. Panics leads to unbelievable prices in stocks. In 2008 panic, so called blue chip stocks like Kotak bank fell 80%. Dividend yield in large caps went to 10%. People were shell shocked by what was happening and many people sold whole of part of their portfolio in that shock.
If you are are able to read this article, you are better than half of the world’s population who don’t have internet access. (4 billion of 7.5 billion people don’t have internet access).
You are literate, and are better than 32 million Americans who are functionally illiterate (yes, 10% of USA population can’t read)
You can see clearly, while 30 crore people (300 million) have low vision hampering their daily activities.
You are an investor in the stock market and are aware of the importance of financial planning. Only 2% of Indians invest in the stock market and not more than 1% of the population do any kind of financial planning.
“If you have food in your fridge, clothes on your back, a roof over your head and a place to sleep you are richer than 75% of the world”
If you woke up this morning good health, you are so much blessed compared to the million people who will not die this week.
Overall, you are extremely lucky compared to the rest of the population!
I have met a few dollar millioniares (1 USD million=7 crores) in India in the past few months, who are pretty low on cash even for daily expenses. One of the families monthly income was only 50k, when the total assets they are holding is more than 10 crores.
Most of these were elderly couples in the age group of 65-80 yrs. The kids were married and settled either outside the country or sometimes even in the country. The key source of current income was the pension of 20-30k per month. In addition, one family was getting a rent of 30k per month from a flat that is worth 2 crores (1.8% rental yield).
One of the families had ancestral property worth 30 crores which is to be divided among 2 brothers and 2 sisters. These brother/sisters are now 70 year old. They have 9 kids, who are now 40-45 year old. The 70 yr old couple would probably never enjoy the riches from their inheritance. In fact, I doubt that even their kids who are now 40-45 yr old will get the cash from the family property in their lifetime. The reason is simple- it is a big piece of land. There is no one ready to buy such a big piece of land. And, even if they get a buyer (they got some buyer in the past), atleast one or two of the kids vote against the selling due to various reasons (bid price is low, or they would develop it into a hotel sometime). The division of land in smaller pieces requires an investment of 1 crore or so, and they don’t have such cash at the moment, and probably never will. Monthly cash flow by pension of this family is only 30k.
The good old days of guaranteed pension in govt jobs got over in 2003-04. Then finance minister Jaswant Singh in his Budget speech, in February 2003, had announced that the new recruits in central govt will have to opt for defined contrubution system to get pension and not the old guaranteed system of pension (except Armed forces).
Defined contribution benefits include NPS, EPF, PPF etc where the pension and retirement benefits are dependent on how much the employee saves during the working years and the return on it.
In view of this, the government launched Atal pension yojna in 2015 administered by the Pension Fund Regulatory and Development Authority (PFRDA).
This is aimed at the unorganised sector such as maids, gardeners, delivery boys, etc.
The person must be 18-40 yrs old and citizen of India
Needs bank account linked with Aadhar
Most important feature of this scheme-Government of India (GoI) will also co-contribute 50% of the subscriber’s contribution or Rs. 1,000 per annum, whichever is lower. The Government co-contribution is available for those who are not covered by any Statutory Social Security Schemes and is not an Income Tax payer. The benefit Government co-contribution under APY would not be limited to 5 years. The contribution from the individual should be for a period of 20 years at the least.
Please note that anyone from organised sector can also apply for Atal pension yojna but he/she will not get benefit of govt co-contribution.
Effectively, it means a govt contribution of 1000 for 5 years, that is Rs. 5,000 total per worker for unorganised workers who apply under this scheme. This is pretty good for the maids/drivers etc who don’t usually save for retirement. This scheme will not only enable them to save but also help them get the govt benefit of Rs. 5000 per person. So, if both husband and wife apply, the total benefit would be Rs. 10,000.
Here is the guaranteed pension under this scheme-
A 35 year old individual needs to contribute Rs. 181 per month for 25 years to get a pension of Rs. 1000 per month for life (starting from 60 yrs of age), and Rs. 902 per month for a pension of Rs. 5000 per month. The individual’s contribution will be auto-debited from the bank account. In the event of death the amount will be handed over the spouse. In the event of the death of both individual and the spouse, the nominee will receive this amount.
The unorganised sector workers usually do not save for retirement or old age. Hence, it is paramount that you educate and help your maid/driver for the same.
The negatives of the scheme are that the payout starts only at 60 years of age and the total amount would be on the lower side. However, something is better than nothing. Premature withdrawl is also not allowed.